JPM remains positive on U.K. domestic banks

Investing.com -- JPMorgan analysts reiterated their positive stance on U.K. domestic banks, citing resilient returns, solid balance sheet momentum, and strong cash generation at appealing valuations. 

“Following recent meetings with senior bank managements, we remain constructive on the returns trajectory of UK domestic banks,” the firm wrote.

Despite a challenging macroeconomic backdrop, analysts noted that management teams are continuing to execute effectively. 

“Operationally, management teams are executing towards targets… and we see the regulatory environment slightly easing across multiple angles in line with the government’s growth agenda,” JPMorgan said, adding that this could “support a lower sector COE towards c10% over time.”

While cautious on certain near-term pressures, JPMorgan highlighted a number of ongoing dynamics. 

“Mortgage spreads remain under pressure… with some market participants earning below the cost of capital,” and margins may stay compressed despite potential ring-fencing changes. 

Meanwhile, “deposit competition has increased, particularly around the recent ISA season,” though no structural behavioural changes are evident.

Trade tensions have had limited direct impact, according to JPMorgan. “Limited impacts to UK Corporates around recent trade escalations, so far,” they stated. They also said Standard Chartered has seen “a benefit to Trade Finance lending.”

Looking forward, analysts see opportunities in expanding wealth and corporate client penetration, and pointed to M&A re-emerging, “particularly for NatWest/HSBC,” though activity remains highly selective.

JPMorgan reiterated its preference for domestic over Asia-exposed U.K. banks, “given the risks on US tariffs and trade/capital flows.” Among its top picks: “We maintain our preference for Barclays/Natwest (both OWs and European Top picks) over Lloyds (LON:LLOY) (UW), given their more attractive valuations with less litigation risk.”